This article is part of our Rising Star Portfolios series.
When it comes to buy-and-hold investing, probably the all-time champ was Shelby Davis. Over his 47-year investing career, he bought more than 1,500 equity positions. According to his biographer, he didn't like selling them, either, preferring what he called the "eternal hold." It worked, too, turning $50,000 at the start into more than $900 million by the time he died.
Warren Buffett, too, is famous as a buy-and-hold investor, saying that "our favorite holding period is forever."
But buy-and-hold is not the only way to make money in the market. Peter Lynch, for instance, purchased -- and sold -- thousands of positions during his tenure at Fidelity. And he did very well, as we all know.
Given the strong bias toward buy-and-hold here at The Motley Fool, I was recently asked on my Messed-Up Expectations portfolio discussion board: "How long do you envision the various positions will be held? Will they all be long term as many TMF services discuss and advocate?"
Here is how I answered that:
From the way I've thought about this strategy, the answer to the second question is "no," and the answer to the first is, "It depends."
A messed-up expectation can arise for various reasons. The market is underappreciating some asset or catalyst that the company has or can achieve or the market focuses too much on a change in the company's environment. As the asset becomes more visible, the catalyst occurs, or the company responds well to that environmental change, outsized returns can be expected. (That's a description of MUE, in a nutshell.)
Picture Sears Holdings
When to get out
As the MUEs resolve, though -- that is, as the market begins to appreciate what the company is actually doing and is capable of over time -- the MUE disappears and can actually go the other way. An overly enthusiastic MUE means it's time to leave. Netflix at $200? Apple at $340? Certainly dot-coms in 2000 and early 2001 or Sears in 2006 or 2007 after the big run-up.
So the MUE picks really aren't being thought of as buy-and-hold for years and years. Rather, I'm trying to take advantage of inefficiency between Benjamin Graham's voting machine in the short term and his weighing machine in the long term, created by investor psychology.
How long any correction takes, I can't predict. It happened pretty quickly with Netflix and Apple. It took nearly 25 years for Coca-Cola
Regarding Western Digital
There's also been some oversupply of the PC hard drive pipeline, hurting margins, so that's another reason to dislike Western. With the last quarter's call, management said it is going to try to correct that inventory bulge and be smarter in the future. Add in the growing need for inexpensive mass storage (and that the PC probably won't disappear within the next few years), and I think the market is giving us a great opportunity to get into this stock.
The final word
So, MUE positions are not necessarily long-term holds along the lines of buy-and-hold. Rather, they'll be held long enough to capture most (I hope) of the move from "misunderstood on the downside" to "well understood" or even "misunderstood on the upside." But I don't know how long that will take for each position.
In summary, for the Messed-Up Expectations portfolio, how long to hold a position can be answered by "hold long enough."
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Coca-Cola is a Motley Fool Inside Value selection and an Income Investor selection. Apple and Netflix are Stock Advisor recommendations. The Fool has written puts on Apple. The Fool owns shares of Apple, Coca-Cola, and Western Digital.
Fool analyst Jim Mueller owns shares of Coke and Netflix, but not of any other company mentioned. He works for the Stock Advisor newsletter service. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.